Siegel and Schwartz argue that there is a bubble in the bond market. Brad Delong is baffled.

I’m not sure if I go quite as far as Brad does. Bonds can be in a bubble if people are mispricing default risk. Indeed, CDOs, which are at the end of the day fixed-income products, were in a heck of a bubble a few years back.

However, is that what’s going on here? A sudden increase confidence in the US? Perhaps, it was Peter Orszag’s latest budget? Or, maybe bondholders are convinced that Democrats will let the Bush tax cuts expire thereby ending any chance of future deficits? Got to get your hands on that government debt before they stop printing it, eh?

Somehow I doubt it any of this.

No, this looks like a good ‘ole fashioned flight to quality. Nothing is certain in life but death and taxes and US Treasuries are backed by the most powerful taxing authority in the world.

But, you’ve heard enough from me on this, I’ll hand the mike to Milton Friedman circa 1998


Initially, higher monetary growth would reduce short-term interest rates even further. As the economy revives, however, interest rates would start to rise. That is the standard pattern and explains why it is so misleading to judge monetary policy by interest rates. Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

Japan’s recent experience of three years of near zero economic growth is an eerie, if less dramatic, replay of the great contraction in the United States. The Fed permitted the quantity of money to decline by one-third from 1929 to 1933, just as the Bank of Japan permitted monetary growth to be low or negative in recent years. The monetary collapse was far greater in the United States than in Japan, which is why the economic collapse was far more severe. The United States revived when monetary growth resumed, as Japan will.

The 4% Club is still accepting nominations